More debt better than more tax - National

National finance spokesman Bill English has signalled his party would increase government borrowing to invest in infrastructure such as roads and water.

English told the Sunday Star-Times the move was viable because government borrowing was lower than headline figures suggested, and using debt would allow investment costs to be spread over many years.

"Our debt is in pretty good shape, but it's in significantly better shape than it looks. So there is no debt problem and hoarding cash as if you did has become a pretty severely limiting factor in future investing," he said.

The Labour-led government had set a target gross debt level of 20 per cent of GDP, but an accounting anomaly meant actual debt was well below this figure, said English.

Since February last year $7.5 billion of debt has been added to the government burden to fund Reserve Bank settlement cash money used to maintain liquidity in the banking system.

This is partially offset by a fall in the issue of Treasury bills but the net position is a nominal debt increase of $4b-$5b. The extra debt has kept the debt/GDP ratio well above 20 per cent - the last Budget showed the figure at 22.6 per cent and staying around that level for the rest of the decade.

In reality, said English, the Reserve Bank simply converts the $7.5b into liquid assets, so "it's counted as debt but it's got nothing to do with the official situation".

Excluding settlement cash, the debt/GDP ratio is 19.4 per cent, and is forecast to fall to 18.8 per cent by 2010.

English said this gave fiscal headroom to use long-term borrowing to pay for infrastructure.

"(The idea that) debt's bad has become a padlock on progressive thinking," he said.

"They're saying they've got to fund infrastructure out of cash, so they are limited in their ability to provide long-term funding to match long-term investment.

"You need a 30-year time horizon. It's better than scrambling for cash and putting up the petrol tax because you're a bit short."

The government's Budget this year included a regional petrol and diesel tax of up to 10c a litre to pay for local transport infrastructure, particularly in Auckland. Tax at that level would produce an extra $120 million a year and could support a debt of about $1.5 billion over 30 years, the government said.

Under the Fiscal Responsibility Act governments must maintain Crown debt at "prudent levels", but the definition of prudent is left to individual governments. Labour has set its target at 20 per cent of GDP.

English said National would not feel bound to maintain Labour's target, but wouldn't say what level of borrowing it considered prudent. "The real limitation is the cost of debt servicing, not the amount of debt."

- © Fairfax NZ News